Wayne Swan continues to pledge that the federal budget will return to surplus by 2012-13 “on track, on time and as promised”. The big question is why we’re not already there, instead of contemplating a $49.4 billion deficit for next financial year (which is around 3.6% of GDP).
After all, the country is enjoying an unprecedented boost from the mining boom. Soaring prices for our key commodity exports of iron ore and coal have lifted our terms of trade to the highest level since the 1870s. The country is close to full employment, with the unemployment rate now nudging below 5% and, after allowing for the Victorian and Queensland floods, the economy is operating close to its trend growth rate.
It’s not all Swan’s fault of course. The largesse shown by the Howard-Costello government in handing out generous tax cuts year after year has contributed to our fiscal woes. According to the latest budget papers, personal income tax accounted for 43.4% of total government tax receipts in 2002-3. By 2007-8 (just before the onset of the financial crisis which caused company tax receipts to shrivel), personal income tax accounted for a mere 40% of total government tax receipts.
Indeed, according to recent work by the federal Treasury, the country’s structural budget deficit (when you take out the boon to government revenues from the higher national income caused by a rising terms of trade) was deteriorating from 2004-5. Treasury estimates that the country was running a structural deficit of around 0.5% of GDP in 2007-8, even before the financial crisis hit.
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Of course, the budget deficit blew out further in the wake of the financial crisis, as the then Rudd government lavished tens of billions in an effort to prevent the economy from sliding into recession. By 2009-10, our structural budget deficit had swollen to 5.25% of GDP.
And even with the economy now recovering strongly, tax receipts are lagging. Consumers have become more cautious, which means that the government has had to scale back its expected revenue from GST and excise duties. At the same time, company tax receipts are lower, as corporates are still writing off the large capital losses they incurred during the financial crisis.
Now Swan is trying to claw back some of this lost ground. He’s aiming for a consolidation in the budget deficit equivalent to 3.8% of GDP over the next two years, which, as he points out, is the largest fiscal adjustment that any Australian government has managed since records were kept.
But Swan needs the country’s phenomenal mining boom to continue if he’s to reach his target of bringing the budget to surplus by 2012-13. Even at that point, the recent federal Treasury paper estimates that the country’s structural deficit will be close to 2% of GDP, but that this will be offset by higher tax revenues flowing into the government’s coffers as a result of the strong terms of trade.
And that highlights the crux of our budgetary dilemma. Because successive governments have frittered away much of the rewards of our mining boom, we’re staring at a $49.4 billion deficit at a time when we’re close to the peak of our economic cycle.
Swan is keeping his fingers crossed that some deft spending trims, combined with a recovery in corporate tax receipts, will return the budget to surplus in two years’ time. Instead, he should be praying that China and India continue to record strong economic growth. Because if the commodity boom comes to an end, his budgetary aspirations will lie in tatters.
*This article was originally published at Business Spectator